Inditex Earnings: Strong Revenue Growth and Profitability; Shares Fairly Valued

We view shares of Inditex ITX as approximately fairly valued, after they gained more than 50% in value over the past year, significantly outperforming the Stoxx Europe 600 Index. The start to 2023 was better than expected as the company reported continued strong double-digit sales growth and margin improvement in the first quarter.

For the first quarter, the company’s revenue grew by 15% at constant exchange rates and continued its double-digit growth in May (May 1 to June 4 sales grew by 16%). From March onward a comparison is easier, as Russian operations were discontinued in March 2022. That said, the growth is still significantly higher than the mid- to high-single-digit revenue increase the company enjoyed before the pandemic despite a tough consumer landscape. We believe strong revenue growth confirms our view that Inditex, with its scale, brand recognition, operational efficiency, and strong execution is a structural market share gainer in a fragmented market. We retain our long-term forecasts for high-single-digit revenue growth for the company.

Profitability also improved for the company in the quarter, with a 40-basis-point increase in gross and EBITDA margin. Excluding the write-down of operations in Russia in 2022, operating income would be almost 19% higher year on year, reaching a 19.5% margin. Inventory turnover also improved, inventory being up only 5% year on year, slower than sales growth. The company expects the net store space contribution to be positive in 2023 after a period of store rationalization as brick-and-mortar continues to perform strongly postpandemic. Technology enhancements in stores that the company is implementing, such as self-checkouts could further enhance customer experience and could improve sales in congested stores.

Last, the company is proposing a dividend of EUR 1.20, with an attractive yield of 3.5%.